The Dogs of the TSX

The Dogs of the TSX is a variation of the Dogs of the Dow, a popular investing strategy in which you buy the 10 stocks with the highest dividend yield on the Dow Jones industrial index, then sell them a year later and begin the process anew. Our version selects the 10 stocks with the highest dividend yields from the S&P/TSX 60 Index.

This is essentially a value strategy, in which we’re looking for companies that have strong fundamentals but are trading particularly cheaply right now. It works because large corporations tend to offer fairly steady dividend increases and will avoid slashing dividends at all costs. Because the dividend yield is the annual dividend divided by the stock price, as long as the dividend remains fairly steady, a high yield is indicative of a low price. In short, these are stocks that are near the bottom of their business cycles, and thus have a lot of upside potential.

This method for choosing stocks has gone through a rough patch lately, but there are signs that performance is starting to improve. Still, it’s advisable to research the individual companies to make sure they haven’t lost the market’s confidence for good reason. As you can see above, many of the 2012 dogs are oil and gas companies, following a year in which strong oil prices were offset by low natural gas prices for some producers.

TransAlta, Canada’s largest publicly traded power generator and marketer—and a chronic dog—is a good example of the mixed prognoses the dogs can produce. The company had a tough first quarter due to low gas prices and high maintenance costs. It also announced that it’s abandoning a $1.4-billion carbon-capture centre. On the other hand, its coal-generated power business is doing very well.

As for BCE, the company that earned the best annual return of the stocks on last year’s list, it’s no surprise it’s back: it has been a resident dog since 2009.

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Canadian Business prides itself in delivering the best investment information to our readers every year in the form of our Investor 500. This year the I-500 is available as an e-book for $3.99. In addition to our investment screens, stories and data-jammed tables, we are rating every single stock in the I-500 universe. Plus, we have chosen 20 stocks based on exclusive criteria that are rated tops in both momentum and value. We hope you find this year’s Investor 500 both interesting and profitable.